Money, Fiat Currencies and Inflation

The invention of money makes trading easier. With money, all prices can be expressed in the same way, in terms of how much money is needed to buy the product. The unit of money becomes the measuring stick of value With a standard of value, computing the costs and benefits of various options, that is, making choices, becomes easier.

A standard of value is most useful when it does not change over time. If the measuring stick changes with time, comparing costs and benefits of some options may be more difficult. Inflation or deflation change the measuring stick, and a reason people dislike inflation is that it makes comparing options over time more difficult.
In addition to its function as a medium of exchange, money also serves as a store of value. Any item that people consider as a way of holding wealth is a store of value. Land, stocks and bonds, old paintings, factories, and jewelry are just some of the other ways people can hold wealth.

When money is a good way to hold wealth compared to these alternatives, people will want to hold a lot of it. On the other hand, when money is a poor way to hold wealth, people try to keep little of it. For example, in Wiemar German hyperinflation people tried to spend money as soon as they got it because it lost value so quickly. This idea, that people are willing to hold large amounts of money when it is a good store of value, but try to hold small amounts when it is a poor way to hold wealth, is a key idea for those who believe that changes in the amount of money have been an important source of economic disturbance.

Because money reduces the costs of making transactions, all societies that have any amount of exchange have developed money. They have used many things as money, including salt, cattle, pigs, goats, tobacco, gold, iron, and bank debt. An item serves as money when everyone is willing to take it in exchange. For example, in World War II cigarettes served as money in prisoner-of-war (POW) camps. Most transactions involved cigarettes, and even people who did not smoke were willing to sell items for cigarettes. Cigarettes did not become money because someone in authority ordered that they be money. Their use as money arose spontaneously because, of the items available, they best served as money. They were limited in quantity, durable, and a pack could be split up for small purchases. To decide what should be counted as money, one must observe what it is that people spend.

What serves as money in the U.S. economy? Paper money and coin certainly do because we spend them. But these forms of money are less important than deposits against which we can write checks. The amounts in checking accounts are about two and a half times as big as the total of currency, and coin,Yet even this statistic overstates the importance of currency and coin. Only small transactions are made with currency and coin, and the total spending done in this form is probably only about 1% of total transactions. For larger transactions, most people and corporations write checks or make electronic transfers.

There is dispute among economists if anything else should be counted as part of the U.S. money stock. Some economists believe that since savings accounts are almost like checking accounts, representing funds that can be quickly obtained and spent, they too should be counted as money. As a result, there are several different measures of money that the Federal Reserve publishes.
The very narrowest definition of money, called the M-1 definition, includes only the public's holdings of coin, currency, travelers' checks, and deposits against which checks can be written. This definition emphasizes the medium-of-exchange definition of money. Notice that when the government or banks hold these items, they are not counted as money; the government is not part of the public.
Broader definitions of money add some very liquid assets such as savings accounts to the M-1 definition. Though debate about what should count as money are very old (with roots in the 19th century), the drastic changes in the financial sector in the late 1970s and early 1980s have made the debate especially confusing. There has been a large increase in deposits which both earn interest (and thus are very much like savings accounts) and against which checks can be written. This difficulty of deciding what should, and what should not, be counted as money is a major problem for theories that argue that much macroeconomic instability comes from the market for money. M-3 grew in the last 3 months by 7.6%, credit is out of control .

In all countries , money represents nowadays a government controlled irredeemable paper, or "fiat," money standard. The widely held view is that this money system would be compatible with the ideal of a free society and conducive to sustainable output and employment growth.
Milton Friedman stated: " the world is now engaged in a great experiment to see whether it can fashion a different anchor, one that depends on government restraint rather than on the costs of acquiring a physical commodity."
Irving Fisher, evaluating past experience, wrote: "Irredeemable paper money has almost invariably proved a curse to the country employing it."

The primary cause for concern rests on a key characteristic of government controlled paper money: the system's unrestrained ability to expand money and credit supply. In contrast, under a commodity backed money system, money , whether that be gold or cigarettes , supply was expected to increase as well over time, but only in proportion to how the economy expanded , an increase in money demand, brought about by an increase in economic activity, would bring additional gold supply to the market (by, for instance, increased mining which would become increasingly profitable).

As such, the gold standard puts an "automatic break" on money expansion the latter would be, at least in theory, related to the economy's growth trend. Similarly with cigarettes , your would have grow more tobacco. The problem you face with the commodity based currencies is that you have transport and store them.
The government controlled fiat money system has no inherent limit to money and credit expansion. In fact, quite the opposite holds true: Central banks, the monopolistic suppliers of governments' money, have actually been deliberately designed to be able to change money and credit supply by actually any amount at any time.

To prevent abuse of their unlimited power over the quantity of money supply, most central banks have been granted political independence over the past decades. This has been done in order to keep politicians who, in order to get re-elected, from trading off the benefits of a monetary policy induced stimulus to the economy against future costs in the form of inflation.

In addition, many central banks have been mandated to seek low and stable inflation ¡X measured by consumer price indices ¡X as their primary objective. These two institutional factors ¡X political independency and the mandate to preserve the purchasing power of money ¡X are now widely seen as proper guarantees for preserving sound money.

Be that as it may, Mises's concerns appear as relevant as ever: "The dissociation of the currencies from a definitive and unchangeable gold parity has made the value of money a plaything of politics. We are not very far now from a state of affairs in which "economic policy" is primarily understood to mean the question of influencing the purchasing power of money.

Whereas the objective to preserve the value of government controlled paper money appears to be a laudable one, the truth is that it is impossible to deliver on such a promise. In fact, there are often overwhelming political-economic incentives for a society to increase its money and credit supply, if possible, in order to influence societal developments according to ideological pre-set designs rather than relying on free market principles.

This very tendency is particularly evidenced by the fact that central banks are regularly called upon to take into account output growth and the economy's job situation when setting interest rates. And these considerations are what seem to cause severe problems in a paper money system if and when there is no clear-cut limit to money and credit expansion.

To bring home this point, it is instructive to take a brief look at the relationship between credit and nominal output and "wealth" growth (which for simplicity, can be defined as gross domestic product plus stock market capitalization) in the US, the euro area and Japan since the early 1980s. A visual inspection reveals that in the US, the relationship between domestic credit and nominal output growth is relatively weak. If, however, credit expansion is plotted against wealth growth, we see that these two variables are actually quite closely related

But a money and credit supply induced stimulus to the economy is short-lived, insights from the classical economic theory warn, and will eventually lead to inflation ¡X as outlined by David Hume in 1742: "augmentation (in the quantity of money) has no other effect than to heighten the price of labour and commodities. In the progress towards these changes, the augmentation may have some influence, by exciting industry, but after the prices are settled it has no manner of influence."

However, the intellectual conviction of the economic mainstream, which is dominated by Keynesian Economics, is that by lowering interest rates the central bank can stimulate growth and employment. So it does not take wonder that, especially so in periods in which inflation is seen to be "under control," central banks are pressured into an "expansionary" monetary policy to fight recession. In fact, it is widely considered "appropriate" if monetary policy keeps borrowing costs at the lowest level possible.

Mises writes: "public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy."

Mises also outlines what the propensity to lower interest rates and increasing money and credit supply does to the economy. He maintains that it is monetary expansion which is at the heart of the economies' boom and bust cycles. Overly generous supply of money and credit induces what is usually called an "economic upswing". It is wake, economic growth increases and employment rises.

With the liquidity flush, however, come misalignments, a distortion of relative prices, so the theoretical reasoning is. Sooner or later, the artificial money and credit supply-fuelled expansion is unsustainable and turns into a recession. In ignorance and/or in failing to identify the very forces responsible for the economic malaise, namely excessive money and credit creation in the past, falling output and rising unemployment provoke public calls for an even easier monetary policy.

Central banks are not in a position to withstand such demands if they do not have any "anchorer of value" that is a (fixed) rule which restrains the increase in money and credit supply in day-to-day operations. In the absence of such a limit, central banks, confronted with a severe economic crisis, are most likely to be forced to trade off the growth and employment objective against the preserving the value of money ¡X thereby compromising a crucial pillar of the free society.

Seen against this backdrop, today's monetary policy actually resembles a "ruleless" undertaking. The Zeitgeist holds that "inflation targeting" the so-called "state-of-the-art" concept from the point of view of most central banks will do the trick to prevent monetary policy from causing unintended trouble. In practice, however, it does not have any external anchor.

Under IT(Inflation Targeting), it is the central bank itself that calculates inflation forecasts which, in turn, determine how the bank set interest rates; setting a quantitative limit to money and credit expansion is usually not seen as a policy objective. IT can thus hardly inspire confidence that it will mitigate the threat to the value of paper money stemming from governments (in the form of fraud/misuse) and/or politically independent monetary policy makers (in the form of policy mistakes).

The return to "monetary policy without rule" began in the early 1990s, when various central banks abandoned monetary aggregates as a major guide post for setting interest rates. It was argued that "demand for money" had become an unstable indicator in the "short term" and that, as such, money could no longer be used as a yardstick in setting monetary policy, particularly so as policy makers were making interest rate decisions every few weeks. However, that guide post has not been replaced with anything since then.

In view of the return of discretion in monetary policy, it might be insightful to quote Hayek's concern, namely that: " [inflation] is the inevitable result of a policy which regards all the other decisions as data to which the supply of money must be adapted so that the damage done by other measures will be as little noticed as possible." In the long run, such a policy would cause central banks to become "the captives of their own decisions, when others force them to adopt measures that they know to be harmful."

Echoing the warning that Ludwig von Mises gave back in The Theory of Money nd Credit, Hayek concluded: "The inflationary bias of our day is largely the result of the prevalence of the short-term view, which in turns stems from the great difficulty of recognizing the more remote consequences of current measures, and from the inevitable preoccupation of practical men, and particularly politicians, with the immediate problems and the achievements of near goals."

What can we learn from all this? The inherent risks of today's paper money standard , the very ability of expanding the stock of money and credit at will by actually any amount at any time , are no longer paid proper attention: Putting a limit on the expansion of money and credit does not rank among the essential ingredients for "modern" monetary policy making. The discretionary handling of paper money thus increases the potential for a costly failure.

A first step for moving back towards the sound money principle which is doing justice to the ideal of a free society would be to make monetary policy limiting, eg, stopping altogether, money supply growth.

Inflation is what happens when people increase the money supply by fraud, imposition, and breach of contract. Invariably it produces three characteristic consequences: (1) it benefits the perpetrators at the expense of all other money users; (2) it allows the accumulation of debt beyond the level debts could reach on the free market; and (3) it reduces the purchasing power below the level it would have reached on the free market.

In a natural system of money production, banks would grant credit only as financial intermediaries. That is, they could lend out only those sums of money that they had either saved themselves or which other people had saved and then lent to the banks. The bankers would of course be free to grant credits under any terms (interest, securities, duration) they like; but it would be suicidal for them to offer better terms than those that their own creditors had granted them.

For example, if a bank receives a credit at 5 percent, it would be suicidal for it to lend this money at 4 percent. It follows that on a free market, profitable banking is constrained within fairly narrow limits, which in turn is determined by the savers. It is not possible for a bank to stay in business and to offer better terms than the savers who are most ready to part with their money for some time.

But fractional-reserve banks can do precisely that. Since they can produce additional banknotes at virtually zero cost, they can grant credit at rates that are lower than the rates that would otherwise have prevailed. And the beneficiaries will therefore finance some ventures through debts that they would otherwise have financed with their own money, or which they would not have started at all. Paper money has very much the same effect, but in a far greater dimension. A paper-money producer can grant credits to virtually any extent and at virtually any terms. In the past few years, the Bank of Japan has offered credits at 0 percent interest, and it right now proceeds in some cases to actually pay people for taking its credits.

It is obvious that few companies can afford to resist such offers. Competition is fierce in most industries, and the comapnies must seek to use the best terms available, lest they lose that "competitive edge" that can be decisive for profits and also for mere survival. It follows that fiat inflation makes business more dependent on banks than they otherwise would be. It creates greater hierarchy and central decision-making power than would exist on the free market. The entrepreneur who operates with 10 percent equity and 90 percent debts is not really an entrepreneur anymore. His creditors (usually bankers) are the true entrepreneurs who make all essential decisions. He is just a more or less well-paid executive a manager.

Thus fiat inflation reduces the number of true entrepreneurs independent men who operate with their own money. Such men still exist, but they can only survive because their superior talents match the inferior financial terms with which they have to cope. They must be more innovative and/or work harder than their competitors. They know the price of independence and they are ready to pay it.

Because credits springing from fiat inflation provide an easy financial edge, they have the tendency to encourage reckless behavior by the chief executives. This is especially the case with managers of large corporations who have easy access to the capital markets. Their recklessness is often confused with innovativeness.

It also cause malinvestment, currently the market rewards speculation so business does not make the last capital investment required to create innovative and new forms of production. Joseph Schumpeter has famously characterized fractional-reserve banking as some sort of a mainspring of innovative economic development, because it provides additional money for entrepreneurs with great ideas.

It is conceivable that in some cases it played this role, but the odds are overwhelmingly on the other side. As a general rule, any new product and any thoroughgoing innovation in business organization is a threat for banks, because they are already more or less heavily invested in established companies, which produce the old products and use the old forms of organization. They have therefore every incentive to prevent the innovation by declining to finance it.

Thus, factional-reserve banking makes business more conservative than it otherwise would be. It benefits the established firms at the expense of innovative newcomers. Innovation is much more likely to come from independent businessmen, especially if income taxation is low. Then there is the fact that perennial inflation tends to deteriorate product quality. Every seller knows that it is difficult to sell the same physical product at higher prices than in previous years. But increasing money prices are unavoidable when the money supply is subject to relentless growth. So what do sellers do?

In many cases the rescue comes through technological innovation, which allows for a cheaper production of the product, thus neutralizing or even overcompensating the countervailing influence of inflation. This is, for example, the case with personal computers and other equipment built with a large input of information technology. Globalising is again changing the ways things are made and sourced .

But in other industries, technological progress plays a much smaller role. Here the sellers confront the above-mentioned problem. They then fabricate an inferior product and sell it under the same name, along with the euphemisms that have become customary in commercial marketing. For example, they might offer their customers "light" coffee and "non-spicy" vegetables which translates into thin coffee and vegetables that have lost any trace of flavor. Similar product deterioration can be observed in the construction business. Countries plagued by perennial inflation seem to have a greater share of houses and streets that are in constant need of repair than other countries.

For those that doubt this there many examples in your grocery store. In 1976 the FDA approved the use of High Fructose corn syrup for use in consumer goods. HFCS was 6 times cheaper the cane based sucrose . The problem is human beings cant metabolise fructose at the same rate as sucrose , so what followed was a boom in obesity . If you examine the quality of many of the foods that were manufactured 50 years ago and the quality now the majority of packaged goods have had products added to them to ensure greater economic efficiency. Similarly with the introduction of Palm Oil as a manufacturing fat addictive, Palm oil is in nearly every manufactured product you eat, unfortunately it has the same bad fats profile as pig fat. We pay for these innovations through our worsening health which is turn paid for by our government health programs.

In most countries, the growth of the welfare state has been financed through the accumulation of public debt on a scale that would have been unthinkable without fiat inflation. A cursory glance at the historical record shows that the exponential growth of the welfare state, which in Europe started in the early 1970s, went in hand with the explosion of public debt

The current international monetary system, like a bad horror movie, is a sort of return of the living dead Bretton Woods. A vestige of the agreement placing the dollar at the center of international finance, securities denominated in fiat U.S. dollars are the most widely held reserve asset. Dollars that were accumulated under the promise of convertibility are now held in such large quantities by most major central banks that they cannot be sold without destroying the value of the remaining asset.

Under the current system, the United States year after year imports goods from the rest of the world for consumption and pays for them with dollars. The dollars are then used by foreign central banks to purchase debt instruments from either the Fed or the private sector, in addition to U.S. stocks and real estate. Where these are treasury securities, they are created out of nothing, requiring no savings by any American consumer.

Under this arrangement, Americans are now freed from the ponderous burden of saving and the onerous requirement of first producing in order to later consume. Their consumption is offset by a growing indebtedness of the private sector and the Fed to foreigners. This state of affairs is unsustainable, and will come to an end with a deep fall in the exchange value of the dollar relative to other currencies. That is the argument of a book, The Dollar Crisis: Causes, Consequences, Cure by Richard Duncan
The system of floating exchange rates between fiat currencies has put the U.S. in the historically unique position of having the largest trade deficits in history, and of being able "to finance its growing level of indebtedness to the rest of the world by issuing debt instruments denominated in its own currency.

Duncan forecasts a "New Paradigm Recession" following the collapse of the dollar, which he compares to the Great Depression of the 1930s. The New Paradigm Recession will emerge out of the continuing U.S. downturn (which Duncan views as only a warm-up for the real thing) as the U.S. economy can no longer service the massive debt load that exists in the consumer, corporate, and government sectors. The recession, when it comes, will be global in scope. It must come, Duncan argues, because of the unsustainability of current trading patterns and exchange rates.
In The Great Wave: Price Revolutions and the Rhythm of History, David Hackett Fischer explores the historical significance of patterns in the secular trend of prices to increase .

¨Fischer observes, over the past eight centuries, four major price revolutions -- steep rises in prices -- punctuated by periods of relative equilibrium in which prices remained stable or grew at a slower pace. Fischer calls this a pattern of "price waves". His aim is to relate the price waves to historical events. He demonstrates how historical contingencies affected the wave structure, and how the waves in turn affected social and cultural developments, thus constituting the "rhythm of history".
Each wave begins with a long inflationary period. Fischer calls these the Medieval Price Revolution (1200-1320), the 16th Century Price Revolution (1520-1620), the 18th Century Price Revolution (1720-1820), and the 20th Century Price Revolution (1896-present). Price revolutions are followed by long periods in which prices remain relatively stable: Following the Medieval Price Revolution, the Equilibrium of the Renaissance. Following the 16th Century Price Revolution, the Equilibrium of the Enlightenment. Following the 18th Century Price Revolution, the Victorian Equilibrium.

Fischer conceives of price waves as an autogenous process whose engine of self-reproduction is driven by individuals' aggregated actions and expectations. In times of price equilibrium, real wages are rising while rents and interest rates are falling. Confidence rises. People marry earlier and have more children, increasing the labor supply. This reduces real wages and thus increases returns to capital. Aggregate demand grows more rapidly than supply, and so prices begin to rise.
As inflation begins to become apparent to everyone, individuals and institutions react in ways that induce yet more inflation: "The stock of money is deliberately enlarged to meet growing demand. Capitalists charge higher rates. Landlords raise the rent. Real wages fall further behind" (Fischer, 247).

Increasing inequality leads to more poverty and homelessness, straining social relationships and intensifying class conflict. Social cohesion diminishes, and consequently people begin making more claims on the state and paying less in taxes. This leads to state fiscal crises. The growing hardships lead to despair, and pessimism spreads. Markets grow less stable. Production and productivity decrease or stagnate. Stagflation ensues. There is general cultural dissolution. Drugs, drink, and sexual infidelity become more common.

People lose the optimism that engendered the inflation to begin with. Widespread pessimism leads people to delay marriage and child-bearing. This reduces the labor supply, drives up wages, and reduces land rents. Inequality begins to decline and social solidarity starts to grow. As demands on state benefits fall, states become more stable and effective. Taxpayer resistance declines. Family and marriage become more possible and attractive. Domestic stability grows while bastardy decreases. But eventually, confidence leads to the usual problems, and the inflationary cycle begins once more.

Based on the most recent examples of hegemonic succession Cjina could ascent to economic powerhouse through the advantages of scale and low cost labor similar to the rise of the Japanese in the 1950¡¦s and 60¡¦s. The irony is that Chinese Capitalists abroad, culturally motivated by tradional tribute systems have been responsible for 80% of the overseas capital invested in China. If the Japanese decide the role of banker to the Chinese and lets face the Japanese are bankers to the world Although we shpuldnt get to carried away the global economy is a sea of nonsense statistics, the Chinese double everything , take away a good portion of the population, promote regional heads who false report and everything else you can imagine . Simple things like the fact if China was really growing at 8% would have to twice as energy efficient than they were 10 years ago.

Equally important, the transnational expansion of US corpo- rations has called forth competitive responses in old and new centers of capital accumulation that weakened, and eventually reversed, US claims on foreign incomes and resources a growing number of European enterprises had found effective ways and means of meeting the challenge and of themselves becoming challengers of the long-established US corporations even in the US market. In the 1970s, the accumulated value of non-US (mostly Western European) foreign direct investment grew one-and-half times faster than that of US foreign direct investment. By 1980, it was estimated that there were over 10,000 transnational corporations of all national origins, and by the early 1990s more than three times as many .

This explosive growth in the number of transnational corpo- rations was accompanied by a drastic decrease in the importance of the United States as a source, and an increase in its importance as a recipient, of foreign direct investment. The transnational forms of business organization pioneered by US capital, in other words, had rapidly ceased to be a "mystery" for a large and growing number of foreign competitors.

By the 1970s, Western European capital had discovered all its secrets and had begun outcompeting US corporations at home and abroad. By the 1980s, it was the turn of East Asian capital to outcompete both US and Western European capital through the formation of a new kind of transnational business organization--an organization that was deeply rooted in the region's gifts of history and geography, and that combined the advantages of vertical integration with the flexibility of informal business networks (Arrighi, Ikeda and Irwan 1993).

No matter which particular fraction of capital won, the outcome of each round of the competitive struggle was a further increase in the volume and density of the web of exchanges that linked people and territory across political jurisdictions both regionally and globally. This tendency has involved a fundamental contradiction for the global power of the United States--a contradiction which has been aggravated rather than mitigated by the collapse of Soviet power and the consequent end of the Cold War. On the one hand, the US government has become prisoner of its unprecedented and, with the collapse of the USSR, unparalleled global military capabilities.

These capabilities remain essential, not just as a source of "protection" for US business abroad, but also as the main source of the lead of US business in high technology both at home and abroad. On the other hand, the disappearance of the Communist "threat" has made it even more difficult than it already was for the US government to mobilize the human and financial resources needed to put to effective use or just maintain its military capabilities. Hence the divergent assessments of the actual extent of US global power in the post- Cold War era.

This is an important turn of events to date people have examined only the military capability in human or technical terms , surely a key factor in the any evaluation of military strengths is the right to act, or the will to act. There is no doubt that the US military can train and sell more than 70 countries with more than 140B worth of arms. (in the last decade) You can even lend these countries the money to buy them. Even if your divorce yourself from any judgment of the morality of this practice, the real results are that it pays marginal dividends at best. There is no doubt that the US could out bomb any country in t he world , but the reality is the that the US is stretched by a single Arab country.

"Now is the unipolar moment," a triumphalist commentator crows. "There is but one first-rate power and no prospect in the immediate future of any power to rival it." But a senior U.S. foreign policy official demurs: "We simply do not have the leverage, we don't have the influence, the inclination to use military force. We don't have the money to bring the kind of pressure that will produce positive results any time soon." (Ruggie 1994, 553)

The contradictions of US world hegemony concern primarily the dependence of US power and wealth on a path of development characterized by high protection and reproduction costs--that is, on the formation of a world-encompassing, capital- intensive military apparatus on the one side, and on the diffusion of wasteful and unsustainable patterns of mass consumption on the other. Nowhere have these contradictions been more evident than in East Asia. Korean and Vietnam wars reveal the limits of the actual power wielded by the US warfare-welfare state.

The structural differentiation of power in the region that has left the United States in control of most of the guns, Japan and the Overseas Chinese in control of most of the money, and the PRC in control of most of the labor. This structural differentiation--which has no precedent in previous hegemonic transitions--makes it extremely unlikely that any single state operating in the region, the United States included, will acquire the capabilities needed to become hegemonic regionally and globally.
It was the first-generation monetarist Irving Fisher who declared 14 days before the 1929 Crash: "In a few months I expect to see the stock market much higher than today.¡¨ Fisher subsequently took a $140 million bath. John Maynard Keynes, the exalted inflationist, lost one million English pounds in the crash. Mises, on the other hand, rejected a high position in one of Europe¡¦s largest banks in the summer of 1929 because he foresaw a great crash coming and didn¡¦t want his name in any way connected with it.

Those who also predict the next boom built upon the monumental debt of the US government and the ongoing consumption of its people remind me allot of Keynes and Fisher. Intuitively , there seems to be a patriotic based bias in the Krondatiev commentary . Capitalism is creative destruction , new products, new market, new ways of doing things. Globalization is an ancient trend it started with ships and moved to telegraph taking many other steps along the way. The latest trends is the creation of global financial market s that traverse soveirng nation states , service markets that export manufacturing and service jobs to English speaking economies. What will happen when the call center we ring to book a flight is answered in India , the plane that we travel on is maintained in Asia, the ticket operating system is outsourced to India, with software from Microsoft that was coded in Russia.

The car you drive is from GM but manufactured in China after the Chinese bailed it out. About 10 years ago I Had several weeks of engagement with Sam Palmisano and Lou Gerstner (1&2 at IBM at the time) during that time I got a really good feel for how they saw the future. There is a book from about 1994 called The Virtual Corporation that both of them referred to as their model for the future of the corporation. Sam mentioned Shumpeters work on the process of innovation in the corporation and his theory that innovation could corporatized from the entrepreneur to the corporation.

The virtual corporation basically envisaged that information technology would allow corporations to re organize into different more effective models. Nike could manufacture in Thailand and sell in NY very much the same as corporations had done in the past within their own region. Nothing really needed to reside in one country or the other , even management could be globalised and outsourced. The are the kinds of changes in innovation that Shumpeter envisaged. The problem is that these changes effect nation prosperity. Lowering the cost of goods by moving employment has a significant inflationary impact through the withdrawal of the productive units of labor from one nation to another, . The corporation doesn¡¦t have any patriotic soul its just has profit and this is the big test that capitalism is now facing in a global market can amercian labor or goods compete with the globalization of the enterprise.. I s economic globalization , which exports wealth from America to the world the optimal form of capitalism for America. There are many quotes from Jackson and Lincoln that reflect the same issues we debased fiat currencies. In reality money has changed, its no longer paper fiat its monetised electronic currency. Its not really worth anything , tis store of value is in trust and belief and those beliefs follow cycles, for what are they but the beliefs of men. Money doesn¡¦t really exist it¡¦s a shared concept that's changed throughout history and I believe is about to change again.

America I believe will rise again through innovation but a debt reckoning must be felt now to ensure the success of my children -todays children, that to me is true loyalty.